Charles Schwab shared its midyear outlook for fixed income. It notes that the asset class has been unusually volatile despite not changing much in terms of fundamentals and monetary policy.  

In the second-half of the year, Schwab sees Treasuries gradually strengthening, particularly on the short-end of the curve. So far, longer-term Treasuries have started to outperform, while shorter-term notes have weakened due to the Fed’s continued hikes. 

However, the firm sees strength across the board in response to slowing inflation and the end of the Fed’s rate hikes due to a weakening global economy. While it anticipates a pause in Fed policy imminently, it believes that the next rate cut cycle will also quickly begin as rates at these levels are quite restrictive especially in an environment of lower inflation.

Further, Schwab believes that longer-term trends are also supportive of fixed income given that fiscal policy will be contractionary, the manufacturing sector is in a recession, wage growth is slowing, and key drivers of inflation such as food, used cars, and energy have also normalized. Loosening Fed policy and falling inflation will be strong tailwinds for fixed income. 

Finsum: Charles Schwab shared its second-half outlook for fixed income. Overall, the firm is bullish and believes that underlying trends of fiscal policy, monetary policy, and inflation are supportive.